Yuan falls against dollar

China's yuan edged down on Friday, pressured by a global retreat in the euro and an end to the wave of dollar selling by state banks that hammered the currency on Thursday. The yuan reached a weak point of 6.3099 per dollar near midday but rallied in the afternoon as the dollar weakened in global markets. It closed at 6.3053, well off the six-month intraday high of 6.2945 hit on Thursday morning but still up 0.1 percent on the week.
The yuan has steadily strengthened since closing at a 2012 low of 6.3885 on July 25, but traders say it will have trouble breaking psychological resistance at 6.30 in the near term. The yuan has now weakened 0.2 percent in 2012. Aggressive selling of dollars by a large state bank began on Wednesday afternoon and continued the following morning, but had run its course by Thursday afternoon.
"A big Chinese bank started dumping dollars, and smaller players followed the wave, pushing the rate below 6.30. Actually the euro was already falling, but people weren't focused on that," said a trader at an Asian bank in Shanghai, referring to the yuan's usual tendency to track the euro.
Offshore, one-year non-deliverable forwards were quoted at 6.4090 in late afternoon, implying that the midpoint would weaken 0.6 percent over the next 12 months. The NDF market has responded weakly to strengthening of spot yuan over the past month, with NDFs still implying one-year depreciation, even as onshore spot is now consistently trading stronger than the midpoint fix, which is generally considered a sign of appreciation pressure. "When the big banks come out to play, people tend to think it represents the central bank's intention. But in the afternoon, the market stepped back and started to consider things rationally," she said.
While some traders detected signs of central bank intervention in the flood of dollar selling on Thursday, most believe the bank has little reason to push the yuan higher at the moment. China's Ministry of Commerce said on Wednesday that the country's export outlook looks grim.
Rather, traders suggested the wave of dollar selling was the result of one or several large bank clients buying yuan to meet their domestic cash needs in the run-up to the end of the fiscal quarter and China's early October holiday. "I think it was just a big client. The midpoint has been stable recently around 6.34, and today it's over 6.34. That sends a signal that the central bank wants stability, not appreciation," said a trader at a major state-owned bank in Beijing. Traders say client flow in recent weeks has tilted towards yuan demand, a shift from the March-July period, when they reported a high appetite for dollars amid safe-haven demand.